3 Reasons for the Unpopularity of Debentures Finance

Some of the reasons for the unpopularity of debentures finance and recent developments in company are: 1. Attitude of the Issuing Company 2. Psychology of the Investing Public and 3. General Causes.

1. Attitude of the Issuing Companies:

The Indian Companies are also considered as very reluctant to depend on debentures finance, though it is an attractive source. The following are the main reasons for their hesitation.

ADVERTISEMENTS:

(1) High Stamp Duty:

The cost of raising capital through debentures has become very high due to the high stamp duty.

(2) Attitude of the Bankers:

The Indian bankers are very reluctant to provide financial assistance to companies which have debentures in their capital structure. Such companies are not looked favourably by the banks in the matter of accommodation.

ADVERTISEMENTS:

(3) Managing Agency System:

The managing agents met the medium term requirement through inter-corporate investments so as to maintain their financial dominance. However, this reason now has no validity because the system of managing agent had been abolished in 1968 itself.

(4) Absence of Issue Houses:

The capital market in our country is not developed sufficiently. The number of issue houses and underwriting agencies is also very much limited. Hence, companies cannot depend on debenture finance because marketing of debentures is also very uncertain.

2. Psychology of the Investors:

The attitude of the investors is not also in favour of debentures. There are a number of reasons for the growing reluctance on the part of the investors to invest their funds in debentures.

Some of the main causes are given below:

(1) Financial Institutions:

Institutional investors generally prefer only debentures because of the reduced risk and increased certainty and stability of return. But in our country most of the institutional investors are public sector institutions. They have to invest a major portion of their funds in Government securities because of the statutory requirements.

(2) Face Value of the Debentures:

ADVERTISEMENTS:

The face value of the debentures is generally high like Rs. 1000 each or Rs. 500 etc. Therefore, moderate investors are not in a position to purchase such debentures.

(3) Terms of Issue:

Debentures are not generally issued with attractive terms, the services of debenture trustees are not available and the debentures cannot be converted into cash quickly. In contrast to our conditions, in U.S.A., the corporations are issuing bonds with highly attractive terms.

The bond holders also have a number of rights and powers. Such powers are not conferred on them in our country. Sometimes, they are also given an option to convert their debentures into shares.

3. General Causes:

Besides the reasons cited above, there are also certain other general reasons which make debenture finance unpopular.

Some of them are given below:

(1) Absence of the Services of Debenture Trustees:

The importance of the trustees cannot be over stressed in making the debentures more popular. Their services are inevitable to safeguard the interest of the debenture holders. Such services are not available to the debenture holders in India.

(2) Nature of the Capital Market:

The Indian capital market is also highly un-organised and less developed. There is no ready market for debentures. The industrial and fiscal policies of the Government are not also stable.

(3) Presence of Rival Securities:

Due to the presence of rival securities like gilt- edged securities of the Government and preference shares in the capital market, the demand for debentures is also affected very seriously.

Recent Development:

Debentures are now becoming a more popular form of security due to the concrete measures taken by the Government. The Public Companies, Commercial Banks etc., are partially responsible for this development.

The reasons for the recent development are the following:

1. The attitude of the commercial banks has been revised.

2. Debentures are now issued with increasingly attractive terms.

5. Due to relaxation in the statutory restrictions, institutional investors feel encouraged to invest more in company debentures.

4. Companies under the same management now make joint issue by offering more securities. Hence, debentures are now more secured then before.

5. Trustee services are now made available. According to the norms for debenture issue announced on 14th January 1987, the appointment of debenture trustees is made compulsory in case of certain companies.

6. The development of issue houses and underwriting firms also enhanced the liquidity and marketability of the debentures.

7. Payment of interest on debentures is now an admissible deduction under Income Tax Act. This allowance made many companies to opt for debenture finance at least to avoid tax.

Thus, the debentures, no longer carries the stigma attached to them earlier. This in fact, is a welcome development in the Indian Capital Market.